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Securities class actions in the US banking sector: Between investor protection and bank stability

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Author Info

  • Dalla Pellegrina, Lucia
  • Saraceno, Margherita

Abstract

This paper investigates whether securities class actions (SCAs) can play a role in banking supervision, both as a warning signal of insolvency and as an instrument of market discipline to encourage bank managers to carefully evaluate risk. Two groups of US banks are compared over the 2000–2008 period. One includes banks that have faced at least one SCA, while the other is composed of non-targeted banks (control group). Results indicate that collective private litigation procedures are more frequently directed at financially fragile intermediaries exhibiting inadequate governance standards. Furthermore, banks which have been subjected to SCAs are likely to reduce their excessive risk positions. This supports the idea that SCAs could be efficiently employed as a complement to public supervisory activity in the banking sector.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 7 (2011)
Issue (Month): 4 (December)
Pages: 215-227

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Handle: RePEc:eee:finsta:v:7:y:2011:i:4:p:215-227

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Web page: http://www.elsevier.com/locate/jfstabil

Related research

Keywords: Securities class action Bank safety Market discipline;

References

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  1. Paul Hamalainen & Maximilian Hall & Barry Howcroft, 2005. "A Framework for Market Discipline in Bank Regulatory Design," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(1-2), pages 183-209.
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  8. Demirguc-Kunt, Asli & Huizinga, Harry, 2004. "Market discipline and deposit insurance," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 375-399, March.
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  10. Allen, William A. & Wood, Geoffrey, 2006. "Defining and achieving financial stability," Journal of Financial Stability, Elsevier, vol. 2(2), pages 152-172, June.
  11. Caprio, Gerard, 2004. "Banking regulation: shadow views," Journal of Financial Stability, Elsevier, vol. 1(2), pages 247-249, December.
  12. Fich, Eliezer M. & Shivdasani, Anil, 2007. "Financial fraud, director reputation, and shareholder wealth," Journal of Financial Economics, Elsevier, vol. 86(2), pages 306-336, November.
  13. Boyd, John H. & Graham, Stanley L. & Hewitt, R. Shawn, 1993. "Bank holding company mergers with nonbank financial firms: Effects on the risk of failure," Journal of Banking & Finance, Elsevier, vol. 17(1), pages 43-63, February.
  14. Philip Strahan, 1998. "Securities class actions, corporate governance and managerial agency problems," Research Paper 9816, Federal Reserve Bank of New York.
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